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IB Economics SL Microeconomics notes
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This document is a summary of what you need to know on Microeconomics for your IB Economics SL exam. These notes are accurate to the course on the DP.
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MicroeconomicsChapter 1
Four factors of production: land, labour, capital, and entrepreneurship.
The term capital concerns physical capital, human capital (all the skills and abilities of the workers),
the natural capital (or environmental capital: expanded meaning of the land factor of production), the
financial capital (financial instruments, such as a stocks and bonds) and the institutional capital (all
the public investments in infrastructures).
Opportunity cost of producing a unit of good A (in relation with the production of good B): Cost good
B per unit/ cost good A per unit; the opportunity cost of producing each unit of good A is x units of
good B.
The production possibilities curve (PPC) represents all combinations of the maximum amounts of two
goods that can be produced by an economy given its resources and technology when there are full
employment of resources and productive efficiency (avoiding wasting).
Chapter 2
Production and productivity can be increased by the specialisation and division of labour. Labour
theory value (The price of a good is the sum of the price of all the labour required to produce it).
Thomas Malthus claimed increasing wages would increase population, leading to misery and
readjustment to the original population.
Supply and demand are ruled by the price mechanism (system of price determination and allocation
of goods in a free market). Market equilibrium avoids all wastes and shortages, reached when
consumers and producers make the right choices in terms of utility.
From a Keynesian pov, demand drives employment. Keynesian believe government should intervene
in the economy to alleviate sever unemployment (by increasing demand: by decreasing interest rates,
increasing purchasing power and consumer confidence).
Reagan in the US and Thatcher in the UK dismantled most of the Keynesian legacy, replacing it with
Monetarism (thinking that government should focus on maintaining price stability, and that any
intervention was likely to cause inflation).
Laffer curve shows counterproductive tax policies.
Circular economy is when the product responsibility remains on the producer, and the consumers
returns the product once its consumption is done, alleviating the effects on the environment.
Chapter 3
Competitive markets allow for many buyers and sellers, opposed to the notion of market power
(monopoly power), where one stakeholder has a large dominance on the market.
The demand of an individual actor consumer indicates the various quantities of a good or service the
consumer is willing and able to buy at different prices during a particular period, ceteris paribus.
There is a negative correlation between demand and price. D=MB
, Market demand is the sum of all the individual demands. Non-price determinants of demand
influence demand. Ex: quality of the product, fashion.
Types of goods:
- Normal goods
- Inferior goods (Cheaper variation of the good)
- Substitute goods (Coke and Pepsi)
- Complementary goods (Tennis balls and rackets)
- Unrelated goods (Wood and pencils)
A change in a price determinant of demand leads to movement along the curve (change in quantity
demanded), while a change in a non-price determinant leads to a shift of the curve (change in
demand).
Chapter 4
Elasticity refers to the impact a change in price has over the demand. If demand is strongly affected, it
is elastic. If demand is weakly affected, it is inelastic. PED is the price elasticity of demand.
PED is the change in demand for 1 good when its
price changes, XED is the change in demand for one
good after a change in price of another one.
The formula of the PED is the absolute value of the
percentage change in quantity demanded divided
by the percentage change in price.
Examples of goods with inelastic PED are vital
medicines such as insulin for diabetic people.
When demand is inelastic, an increase in price
causes an increase in total revenue of the firm,
while decrease in price causes a fall in total
revenue.
When a demand is elastic, an increase in price
causes a fall in total revenue while a decrease in
price causes a rise in total revenue.
Increasing the price of inelastic goods is frequently
done by sellers, even if it can be unethical in some
conditions.
The lower the price elasticity of demand for the
taxed good the greater the governmental tax revenues (e.g. Tabaco, Oil …).
XED for two goods is positive when the demand for one good and the price of another good change
in the same direction (if price of good “A” increases and quantity demanded of good Y increases too).
This occurs when both goods are substitutes. The larger the XED is, the higher degree of
substitutability is.
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